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Can Korea Unite And Conquer?

November 15, 1992

International Business

CAN KOREA UNITE AND CONQUER?

The chairman of South Korea's Daewoo group, Kim Woo-Choong, is known for grabbing catnaps on airplanes or in the backseat of a car. The white-haired 55-year-old needs the rest. He works at a frenetic pace, with 18-hour-long days and marathon travels that keep him away from Seoul some 200 days of the year. He used to spend most of that time in the U.S., Europe, or the Middle East. But these days, Kim is more likely to pop up in Pyongyang, Beijing, Moscow, or Ulan Bator.

The reason is that Kim has emerged as point man in his country's attempt to create a "Greater Korea." He and a growing corps of Korean executives and politicians are shaping a new vision of Korea's future. Rather than concentrate on the U.S. and Europe as partners, they want to create an economic zone that combines the best elements of South and North Korea, which have been mortal enemies for nearly 50 years. That vision includes neighboring regions of China and Russia, where 3 million ethnic Koreans live (map). None of this would have been thinkable just a few years ago, as cold war hostility lingered.

One goal of this Greater Korea strategy is to achieve reunification with the North--but not too quickly. Having witnessed the enormous costs and social dislocations of German reunification, the South Koreans want to create economic prosperity first. Cultivating communities of solidly capitalistic Koreans in China and Russia, they argue, will spread to North Korea and ease the trauma of reunification. Already, signs on China's Shandong Peninsula, directly across the Yellow Sea from the Korean Peninsula, are written in Korean as the number of small and medium-size Korean companies operating there surges.

NORDPOLITIK. But there are also urgent economic reasons for Korea's northern push, its so-called Nordpolitik strategy. Rich in resources, such as petroleum, timber, and coal, Northeast Asia has enormous potential but scant ability to develop itself. South Korea is in the opposite predicament: lots of money but few resources. "We'll bring in capital and technology," says Kim. "What we need is political will" to fully open the doors. Daewoo is the most aggressive of the big Korean chaebol, with plans to invest as much as $1.1 billion in China, the former Soviet Union, and North Korea through 1995. Many other Korean companies also are plunking down their largest investments to date.

In effect, the South Koreans are using these new relationships to shift their entire economic strategy. With the U.S. and Europe griping about Korean exports, a new flood of Korean products is beginning to hit the Asian mainland. At the same time, cheaper labor in bordering lands could help the Koreans lower the costs of their exports, which are becoming expensive as wages rise and the currency strengthens at home. Wages in northern Chinese provinces are a mere 10% to 15% of South Korean levels.

The Koreans have been cautious about investing in China, where there are few legal protections. But now that they have established diplomatic relations with Beijing, investments could pick up briskly. One estimate puts Korean investment in China at $2.5 billion by 1995, with overall trade exploding to $20 billion, doubling from this year.

Geopolitics is clearly working to South Korea's advantage. In late September, President Roh Tae-Woo paid a historic visit to Beijing, ending an era of hostility that lasted four decades. Business was high on the agenda. Besides Daewoo's Kim, the entourage included 36 top corporate leaders, including Hyundai Chairman Chung Se-Yung and Sunkyong Chairman Chey Jong-Hyun.

Russian President Boris Yeltsin, his relations with Tokyo stalled, also is hoping to dramatically expand ties with the Koreans. He plans to visit Seoul this month to discuss such projects as a $20 billion proposal to develop Siberian natural-gas fields and one to build new rail links and roads. The Seoul trip comes on the heels of the Russian leader's abrupt cancellation of a visit to Japan. At issue: the longtime dispute over ownership of the Kurile Islands. As a result of the impasse, Seoul has stolen diplomatic momentum from Tokyo.

MINING RUSSIA. Such budding ties with Moscow and Beijing put pressure on North Korea to open up its markets and ease its hard-line attitudes, such as refusing foreign inspections of its nuclear weapons capabilities. Neither is happening quickly. Although it has flirted with Daewoo's plans to set up plants for manufacturing consumer goods such as shirts, toys, and kitchenware, the North has so far avoided opening its doors very wide. The 38th Parallel separating North from South is still protected by miles of razor-sharp concertina wire and armed checkpoints.

Direct trade with the North has also been hampered by politics in the South. In 1991, Daewoo's imports from North Korea represented a tiny fraction of South Korea's $166 million total. But, in the first eight months of this year, Daewoo's share rose to 50%, triggering complaints to the Seoul government from rival Samsung Group. That prompted the government to put the brakes on Daewoo's activities. Plans for factories are on hold for now, but Daewoo did send in a team in October for preliminary studies.

The South Koreans remain convinced, however, that over time their strategy will force the Hermit Kingdom to open up. So they are plunging ahead--building their stakes with Pyongyang's erstwhile supporters. Already, South Korean companies are highly visible both in Moscow and in Russia's Far East. The first thing a traveler arriving at Moscow's Sheremetyevo International Airport sees are giant billboards advertising Hyundai, Sunkyong, Goldstar, and several other South Korean companies. And South Koreans are plunking down more, with $7 million invested in the first half of 1992, up from $3.6 million in all of 1991.

The centerpiece of Daewoo's Russian strategy is the $20 billion plan to develop Siberian natural gas. Chairman Kim has persuaded Yeltsin and President Roh Tae-Woo to agree to a plan to lay a gas pipeline from Yakutsk in eastern Russia through North Korea to the South, and eventually by undersea pipeline to Japan. Kim cleared a major hurdle in January when North Korea's supreme leader, Kim Il-Sung, agreed to go along.

According to the plan, a consortium of Russian and South Korean companies will be formed soon to harness the estimated 1 trillion cubic meters of natural-gas reserves, the largest gas field outside of Alaska. Consortium members are likely to include Daewoo, Korean oil giant Yukong, Samsung, Lucky-Goldstar International, and the government-owned Korea Petroleum Development. Daewoo executives say a three-year feasibility study costing $100 million is under way.

The Russians, long frustrated in their bid to draw the Japanese into developing their natural resources, see the pipeline as an example of Korean commitment to their market. "The Japanese looked at it for a long time," observes Victor N. Koptevsky, director general of the Asian department of Russia's Ministry for Foreign Economic Relations in Moscow. "But the Korean companies are more active and decisive."

Kim also plans to build a new road and railway line simultaneously, as gas pipes are laid. New transportation routes with Russia are essential because the key Trans-Siberian rail link is badly clogged with traffic. Moreover, rails from Russia to China and North Korea are of different gauges. An efficient new line could give South Korea better access not only to Asian markets but to Western European markets, too.

Daewoo's high profile in Russia is starting to pay off in other ways. The company has obtained some core technologies, such as carbon brake discs for aircraft from Russia's Niigrafit and Aviaexport. Kamov Helicopter Scientific & Technology Co. of Russia will provide design and manufacturing technology for a 100-pound pilotless helicopter used for spraying pesticides in countries from Thailand and Vietnam to the U.S. And, in June, Daewoo took over a state-run consumer-electronics factory in St. Petersburg. Operated by Positorn Co., the venture will manufacture VCRs, refrigerators, TVs, and audio devices under Daewoo's brand name. Half of the output will be sold in Eastern and Western Europe.

CAPITAL-INTENSIVE. Korean companies have other interests in the Russian Far East. Led by Kohap, up to 100 Korean companies are planning investments in a free economic zone at the port of Nakhodka, Russian officials say. Hyundai has a timber joint venture in Primorski Krai, near Vladivostok. Altogether, 25 Korean companies have representative offices in the former Soviet Union, according to the Korean Trade Center in Moscow. At least 10 more companies may establish a presence after Yeltsin's visit to Seoul.

Kim's efforts extend beyond Russia. He has signed a $600 million joint venture, for example, with Uzbekistan's government to produce 160,000 cars, trucks, and buses annually. The vehicles will be manufactured starting in mid-1994 and marketed in the former republics of Central Asia. Many of those deals were clinched by ethnic Koreans living in the region.

The Koreans have the vast former Soviet Union virtually to themselves, with scant competition from the Japanese or Taiwanese. China is a different story, however, where rivals are more established. So the Koreans feel pressure to better define their niche. Instead of small, labor-intensive operations that have dominated investment in China, the Korean chaebol are now announcing massive, capital-intensive projects in the electronics, machinery, steel, petrochemical, and automotive industries. The Halla group, a cement and construction and engineering conglomerate, plans to build a $220 million cement plant and facilities for automobile and heavy-equipment production in Hebei Province. Pohang Iron & Steel is planning to invest $95 million in Shanghai in steelmaking technology that will help supply specialized products. And Samsung has signed a contract with Jilin Chemical Industry Corp. of China to invest $200 million in an ethylene production plant in Jilin Province.

There are, of course, risks to South Korea's thrust into the mainland. Aside from the obvious problems of political stability and currency conversion, strategists must worry about creating future competition from the Chinese themselves. By transferring technology to the Chinese in heavy-industrial and consumer-products sectors, the Koreans could one day suffer the same "boomerang" effect they inflicted on the Japanese. "The opening of the Chinese market to foreign companies is a good chance--but also a potential threat for Korea," comments Chun Jin-Hwan, president of Lucky-Goldstar.

Yet South Korean executives realize that they need to be there. The risk will just have to be managed. "Before the Chinese are able to fully digest all our technology and use it against us in the international market, we will be far ahead," insists Kim Hun, executive managing director of Samsung Electronics.

SINGLE-MINDEDNESS. Although some critics warn that the Koreans are overextending themselves, Kim, in particular, is pushing Greater Korea with the same single-mindedness that he has used to drive Daewoo ever since he founded it in 1967. This chain-smoking workaholic, who prefers a bowl of Korean instant noodles to caviar and champagne, now spends more of his time on this international push than on Daewoo's shipbuilding, automobile, or electronics ventures. The difficulties actually appeal to him. "I smell money when there is risk," he says.

Kim may be in the vanguard, but across South Korea's executive ranks there is excitement about Greater Korea. They see golden market conditions that prevailed in South Korea in the early and mid-1970s: low wages and disciplined workers. Only now, the South Korean giants are far more experienced and technologically more advanced than they were 20 years ago. This northern strategy could even help the South Koreans battle a wave of cheap, well-made products the Japanese are turning out from production bases in Southeast Asia.

So the strategy that President Roh initiated by inviting China and the Soviet Union to the 1988 Seoul Olympics has now blossomed beyond pure diplomacy. The moves may eventually prompt reunification with North Korea by about the year 2000. And in so doing, this strategy could also lend huge new momentum to South Korea's flagging economic drive. No matter what the risks, the Koreans figure, it's a plunge they have to take.Laxmi Nakarmi in Seoul, with Rose Brady in Moscow and Lynne Curry in Beijing